Sep 05, 2013 12:49 PM IST | Source: CNBC-TV18

Rajan wows D-street; but too early to celebrate: Kotak Eq

QE tapering, elections are two major uncertainties for Indian market as of now, says Sanjeev Prasad, Senior Executive Director & Co-Head, Kotak Institutional Equities.

The market-friendly stance of new RBI governor Raghuram Rajan is pleasing and the market has reacted positively to measures announced by him, but it is early to say India has turned a corner, says Sanjeev Prasad, Senior Executive Director & Co-Head, Kotak Institutional Equities.

In an interview to CNBC-TV18 he said that the governments needs to a lot more to deal with macro issues like correcting the deficits and boosting investment cycle.

QE tapering, elections are two major uncertainties for Indian market as of now, he added.

On specific stocks, Prasad finds valuations of Federal Bank very attractive at current levels. He expects Coal India’s production to increase by at least 4-5 percent going ahead and sees the company announcing a large dividend. Further he added that the rally in global iron ore prices has provided a boost to NMDC.

Below is the edited transcript of Sanjeev Prasad’s interview with CNBC-TV18

Q: Would you be tempering our enthusiasm or do you think there are better times to come for the markets because of what you heard yesterday?

A: It is too early to say. The new Reserve Bank of India (RBI) governor has taken charge and initial announcements from him are pretty positive and the market is giving him a very good ovation. I am pretty excited about the medium term things which he talked about yesterday in terms of giving more flexibility for branch licensing and moving to a situation where Statutory Liquidity Ratio (SLR) can be brought down gradually over a period of time.

Looking at the fact that he is talking in terms of market forces playing out properly, more amount of transparency and predictability in the strategy of RBI, the market is looking at it positively.

As far as the market view is concerned, honestly it is very early days, we still need to fix a lot of things as far as the current account, balance of payment, fiscal deficit and the investment cycles are concerned. The government is starting to get to some grips as far as the problems are concerned but a lot more needs to be done. So you have pockets of valuations which would emerge after the deep correction of the market particularly in the banking sector so you are seeing some rebound over there.

However it is too early to get overly excited about the fact that India has turned the corner and everything will be alright. A lot depends on the follow up actions compared to whatever has been announced so far. More important how do global events play out particularly in respect to the Federal Reserve tapering and coming to India what is eventually the outcome of elections in eight-nine months time? So there is still a lot of uncertainty with respect to the Indian market.

Q: With the Rajan effect do you think we may see the currency linger between around straddling 65/USD or do you think it is still very much open to the 68/USD mark?

A: It all depends on how the follow-up actions take place. On a fundamental basis, I would think there is some amount of overshoot in the currency if you look at strictly by the Real Effective Exchange Rate (REER) then you are looking at somewhere in the low 60’s as the right value for the rupee. But having said that, we still have a lot of challenges on the current account side and more on the BoP keep in mind the fact that oil prices are still on the higher side.

Even if you take oil at USD 105 average for the current fiscal year, we are still looking at CAD of somewhere about USD 74 billion not too different from what the government is looking at. But if oil prices continue to remain at current levels then you are looking at much higher levels of CAD. Every USD 1 is equal to about USD 1.1 billion on 12 month basis. So unfortunately CAD could be closer to USD 80 billion if crude prices persist at current levels. So that is one thing to keep an eye on.

The second factor is the flows to finance the CAD and there is no guarantee over there. Look at the last three months data June-July-August ever since the US Fed gave the first hint of tapering, something like USD 12 billion has gone out of India between debt and equity. This could continue, at some point in time the Fed is going to implement the tapering program. We need to watch whether India can put in some amount of prevent steps to either curtail CAD to a much more manageable level below USD 70 billion to start with and how do we ensure that capital flows come in at a time when the global environment is not that supportive. So, problems are still there.

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